On Monday the National Credit Union Agency announced a pair of breakthrough mortgage-backed securities settlements. Deutsche Bank agreed to pay the government’s credit-union regulator $145 million for its role in underwriting mortgage-backed notes purchased by five credit unions that subsequently failed. Citigroup threw another $20.5 million into NCUA’s settlement pot, which will offset the $5 to $9 billion in fees the agency is charging solvent credit unions to pay for losses associated with the five failed institutions.
As best I can tell, these are the first settlements of MBS securities claims (as opposed to put-back contract claims) since Wells Fargo’s landmark $125 million class action MBS settlement this summer. That means the NCUA deals are just the second and third MBS securities settlements that plaintiffs have scored. They’re also, as the Wall Street Journal noted, the first MBS securities recoveries by a government agency. (Again, I’m distinguishing between securities and put-back claims; Fannie Mae and Freddie Mac both reached put-back settlements with Bank of America in January.)
So, given the paucity of MBS securities settlements, what clues do the NCUA settlements offer for the future of the litigation?
Most crucially, the deals indicate that there’s value in MBS securities litigation — which had been an open question to date. National Credit’s legal team, led by Kellogg, Huber, Hansen, Todd, Evans & Figel, didn’t file complaints against Deutsche or Citi, but NCUA has previously sued Royal Bank of Scotland, JPMorgan Chase, and Goldman Sachs as underwriters on the mortgage-backed notes the five failed credit unions bought. Based on the agency’s most recent complaint, a 175-page behemoth against Goldman that was filed in Los Angeles federal court, NCUA’s theory of recovery is basically what we’ve seen in so many MBS filings: underwriters have broad liability under Sections 11 and 12 of the Securities Act of 1933. Investors aren’t required to show that underwriters intended to defraud anyone, but only that offering materials contained false statements or omissions. The NCUA’s Goldman complaint includes the now-familiar allegations that prospectuses for Goldman-underwritten mortgage-backed notes made false statements about the quality of the loans in the underlying mortgage pools, so Goldman is strictly liable. (The complaint also asserts California and Kansas state-law claims.)
Goldman hasn’t yet filed a motion to dismiss the NCUA case, but RBS’s lawyers at Kirkland & Ellis moved to toss the agency’s parallel case. the RBS motion raises the defenses that just about every MBS securities defendant has trotted out: The failed credit unions were sophisticated investors; the prospectuses were materially sound; and the NCUA’s claims are barred by the statute of limitations and the (more obscure) statute of repose. Presumably, those are the potential arguments lawyers for Citi and Deutsche Bank considered when they analyzed the banks’ odds of getting an NCUA complaint tossed. They nevertheless decided it made sense for the banks to settle.